Effects of subsidies distribution and market structure change in the duopolistic transit market

By reviewing the existing organizational and operation arrangements of public transit system in China, this paper firstly explored a pricing competition model between profit maximizing operators and consumer surplus maximizing operators on a single route. Under this mixed duopoly market, effects of two widely used polices (fare subsidy and nationalization) on equilibrium fare changes are investigated through diagrammatic and numerical comparisons. Several conclusions from numerical calculations provide useful suggestions on setting policies in this duopolistic market. First, the private duopoly arrangement is more preferable than any mixed duopoly arrangement, as it produces more consumer and social surplus induced by lower equilibrium fares. Secondly, the application of any subsidy scheme can contribute to lowering equilibrium fares, improving consumer surplus and boosting public transit demand, which is in line with the standard results in the extant literature. Thirdly, given a certain amount of subsidies per trip, subsidizing on the low quality operator (bus) can achieve much better efficiency than any other subsidy schemes. Finally, it is noteworthy that in all of the scenarios reported, subsidization rules and the structure of transit market will definitely affect how optimal fares will be set.